Tax time provokes many headaches for small business owners. There are enough tax filing rules, considerations, and items that you absolutely cannot miss, to begin with, especially if you don’t want to raise any red flags with the Internal Revenue Service. This year, there are additional rules and revised documents to tax filing season—courtesy of COVID-19.
Socially distanced activities like Zoom calls, starting new indoor hobbies (think puzzles and baking), and drinking copious amounts of wine (to cope) are only some to name. But there are a few other considerations that you should know about—particularly when it comes to filing your 2020 tax return.
Here’s what you need to know when filing:
Plan ahead this tax-filing season
Do you typically file a paper tax return? You might want to re-think that choice. This year, the pandemic will likely affect your tax filing ability. Effects can range from slowing down your assessment, or triggering complications around getting your refund. If you currently work with an accountant, they’ll likely encourage you to file digitally—just like how you will meet them digitally, too.
IMPORTANT: This year, the Biden Administration made an exception to this rule for the 2020 tax year. When filing your tax return in 2021, the deadline for individual federal income tax filing is extended from April 15 to May 17, 2021 in response to the ongoing pandemic.
If for whatever reason you need more time, you can also file Form 4868 to request a filing extension until October 15, 2021
If you prefer filing a physical return, you can still take that tax filing approach. Just note that it may take anywhere between 6-8 weeks for the IRS to issue you your assessment due to on-site processing limitations in tax centers. And that’s from the date the IRS receives your return and if you file a complete and accurate paper tax return!
How to file if you received COVID-19 financial aid
COVID-19 was a hard year for Americans. Many individuals and business owners lost their jobs or had to close shop. Thankfully, many Americans received aid in the form of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) programs. Evaluating these tax impacts aren’t as easy as accepting the aid, thought. An H&R block study of small business owners showed that fewer than 1 in 3 (28%) are confident that they understand the financial and/or tax implications of receiving aid as a result of the COVID-19 pandemic.
As a small business owner, you’re not alone. Many of us relied on business relief programs to stay afloat.
Not sure what your tax impacts are? If you relied on any of these four financial relief programs under the CARES Act, here’s a summary of what you need to know:
- Paycheck Protection Program (PPP).
- Economic Injury Disaster Loans (EIDL)
- Employee Retention Credit
- Payroll Tax Postponement
Did you know? A forgiven PPP loan is not taxable for the sake of federal tax purposes. Typically, a forgiven loan will be counted as a cancelled debt, which is considered taxable income.
Paycheck Protection Program (PPP)
In the spring of 2020, hundreds of thousands of business owners were able to borrow up to 2.5 times their average monthly payroll, up to $10 million, thanks to the CARES Act.
The PPP has a key advantage: as long as you follow the rules, your loan can be forgiven, which means it serves as a grant. For federal tax purposes, that means that as long as it’s a forgiven loan, it will not be taxable.
Economic Injury Disaster Loans (EIDL)
Under the CARES Act, the EIDL expanded eligibility to a Small Business Association (SBA) loan program. This allowed small business owners to receive:
- an EIDL allowing them to borrow up to $2 million
- an EIDL Advance, which provided a cash advance that did not need to be repaid of up to $10,000
Employee Retention Credit (ERC)
The ERC was critical to helping business owners to retain employees by allowing them to claim a payroll tax credit.
Payroll Tax Postponement (PTP)
In 2020, the PTP allowed employers to defer payment of their portion of Social Security and certain railroad retirement taxes. Like the ERC, these deferred payroll taxes are handled on the employment tax return, not the income tax return.
Self-employed taxpayers will calculate the maximum deferral amount for net earnings from self-employment on Part III of Schedule SE, which will ultimately be reported on Schedule 3 and Form 1040.
Can I still deduct expenses made using loan money?
Typcially, you wouldn’t be able to do that before the new age of COVID-19. But thanks to the entrance of COVID-Related Tax Relief Act of 2020 (COVIDTRA), US business owners can now deduct qualifying expenses paid with proceeds from your forgiven loan, credit or tax advance. Each of these programs and state rules vary slightly, so when tax filing, be sure to:
- Confirm tax impacts for each (if you received the financial aid)
- Review what COVIDTRA has clarified (released on December 21, 2020)
- Check your state rules (depending on where you live)
It all comes down to timing
Unfortunately, many business owners will enter tax filing with uncertainty. Many business owners won’t know if their loans are forgiven as they head into tax season. There is a silver lining though—COVIDTRA clarified that both tax basis and other business attributes will not be impacted by loan forgiveness.
Go digital with your tax filing
As with other COVID activities, going digital this tax filing season should be another consideration—especially if you want to avoid receiving any notice or letter from the IRS. After all, no news is good news!
How Kashoo complements your tax filing this year
A cloud-based, secure solution to manage your transactions for easy filing. Managing your business expenses is easy with Kashoo through our bank feed connect feature. By connecting your business bank account, all of your transactions flow seamlessly into Kashoo. From there, you can review, sort, and sift through income and expenses throughout the year, instead of at tax-filing time. As your bookkeeping powerhouse, you can easily export data such as total account income, or expenses that tell you what you can and cannot claim as tax credit.
Smart scanning & matching features to help you save time. Tax filing is a lot of work. You need to set time aside, and not to mention it’s a focus-heavy task. With TrulySmall Accounting, you get access to our built-in optical character recognition (OCR) scanning for your receipts and their corresponding transaction. For example, if you received payment from your client, your bank feed will pull that data, scan the information, then match it to the corresponding invoice that you create via the Invoices tab.
Have you seen? The Get Ready for Taxes page on the IRS website offers a wealth of accurate information you need to know before you start tax filing.
Conclusion: You’ve got this!
Tax filing is never easy, and the pandemic doesn’t help at all. Whether it’s planning ahead, knowing how to file for emergency benefits, knowing the newly introduced benefits, or going digital, you’ve got this. You started your business and you made it this far. With the right mindset, awareness, and tools, tax filing should be a piece of cake this year.
Looking to prep for tax filing in the age of COVID-19? Sign up for the TrulySmall Accounting free 14-day trial to explore our delightful features to find out how you can go into tax season feeling confident.